The House Ways & Means Committee surprised Congress-watchers recently when it published a list of proposed tax hikes to help pay for the huge spending bill President Biden is pushing for. Many tax hikes on the list were expected, but not an increase in the federal tax on cigarettes and other forms of tobacco.
House tax writers want to double the $1.01 federal excise tax on a pack of cigarettes, with similar hikes in other tobacco taxes. It would also tax e-cigs for the first time. Those taxes would raise about $11 billion per year, money that is crucial to funding the green energy and social-welfare spending Biden and most Democrats support.
But Biden can’t sign a bill with a hike in the cigarette tax, for one simple reason: He has repeatedly pledged not to raise taxes on any household earning less than $400,000 per year. Since smoking isn’t just for the rich, Biden would be breaking a promise to voters, which Republicans would gleefully exploit in the 2022 midterm elections and in 2024, should Biden run again.
So why would Congressional Democrats propose such a tax hike in the first place? Because it’s very hard finding the amount of new tax revenue needed to fund the $3.5 trillion in new spending Biden’s aiming for. “Tax writers are scouring the earth for potential offsets,” Beacon Policy Advisers explained in an analysis of the proposed tax hikes.
That new cigarette tax may not make it to final legislation, but the fact that it materialized at all illustrates the difficulty Democrats will have getting a major set of tax hikes across the finish line. It seems plausible they’ll be able to raise the income tax rate on top earners and pass a modest increase in corporate income taxes. But those alone won’t be enough, and Biden himself has complicated the job by essentially declaring other sensible tax hikes off-limits.
Many economists, for instance, think the best way to speed the transition from fossil fuels to renewables is a carbon tax that would make fuels that cause global warming increasingly expensive over time. As fossil fuel costs went up, it would make more and more sense for producers to invest in renewables, which would get cheaper as scale increased and innovation led to technical breakthroughs. But producers would likely pass cost increases on to consumers, undermining Biden’s tax pledge.
Biden’s self-imposed threshold
It’s possible to compensate consumers for higher energy costs, leaving them no worse off, on average. A carbon tax would generate federal revenue, which the government could rebate to consumers through other types of tax breaks. But if Biden signs off on any single tax hike that affects a single person below his own self-imposed threshold, the details won’t make it through the megaphone of smash-mouth politics. If you’re explaining, you’re losing, political pros often say.
The United States needs a new transportation tax to supplement or replace the federal gasoline tax that funds the nation’s highways. The gas tax doesn’t apply to electric vehicles, the fastest-growing segment of the market, and it brings in diminishing revenue anyway as cars get more efficient. One solution would be a “vehicle-miles-traveled” or VMT tax, which drivers would pay based on how much they drive instead of how much gasoline they buy. But again, this would be a new tax on ordinary Americans, which Biden can’t abide, even if Congress passed a corresponding cut in the gas tax or killed it altogether.
Biden must even parry claims that raising the corporate tax rate would hurt middle-class workers. Some economists say higher taxes on businesses make workers less productive and ultimately dampen wage growth. In a 2020 analysis, the Tax Policy Center argued that 80% of the cost of Biden’s business tax hike would fall on investors, but 20% would fall on labor in the form of suppressed wages. Businesses aren’t likely to directly cut pay the moment their taxes go up, but Biden’s Republican critics are already shouting “Gotcha!”
Voters will ultimately decide if they feel better or worse under Biden and whatever tax and spending plans Democrats eventually pass. This or that political attack line may not matter if voters get a good vibe from Bidenomics overall. But fear of the attack is already shaping what Democrats produce, and it could generate a less effective outcome in the end.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.